Watch Out For Tax Torpedos


Your Weekly Tax Tip
Phone: 323.292.5407
Beware the Tax Torpedo
Large retirement account balances can cause Social Security tax problems
article image

Putting off distributions and holding assets in your retirement accounts as long as possible may seem like a good idea, but waiting too long can cause a major tax problem. When you reach 70 ½, the trigger requiring minimum distributions (RMDs) from qualified retirement accounts is pulled and a potential tax torpedo is launched.

RMDs explained

RMDs apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Amounts not distributed on a timely basis can be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs. Required withdrawals must be completed by April 1 following the year you turn 70 ½ and Dec. 31 every year thereafter.

The RMD rules ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut by applying income taxes to your tax-deferred savings account balances. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.

The tax torpedo

If you continue to wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 70 ½. These higher balances mean a higher annual taxable withdrawal amount. If your required retirement plan distribution is large enough, it may apply a higher marginal tax rate on your withdrawals, as well as trigger taxes on your Social Security. Depending on your income and filing status, up to 85 percent of your Social Security benefit could now be subject to income tax.

Some tips

Plan withdrawals. Once you hit age 59 ½ you may withdraw money from qualified tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce future tax risk on your Social Security, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 70½.

Starting Social Security. You may begin full Social Security Benefits after you reach your minimum retirement age. However, your benefit amount can increase if you delay your start date up until age 70. Consider this as part of your plan to manage a potential tax torpedo.

See an advisor. There are many moving parts in planning for retirement. These include Social Security Benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient.

Category: Retirement

Published: 12/07/2018


Please Don’t Audit Me


Your Weekly Tax Tip
Phone: 323.292.5407
Five Reasons Why the IRS Will Audit You
article image

Each year, the IRS audits over 1 million tax returns. With agency resources shrinking, the IRS is more selective when choosing tax returns to audit. Knowing what the IRS is looking for can help you understand and reduce your audit risk. Here are five of the biggest reasons the IRS may choose to audit your return:

  1. Your income is high or low. The reasoning is simple – higher earnings may lead to bigger errors and lower earnings may mean incorrect deductions. The adjusted gross income (AGI) range with the least audit risk is $25,000 – $200,000. As your income moves toward the extremes in either direction, the chance of audit increases.
    IRS Audit Odds
  2. You fail to report all your income. The IRS Automated Underreporter Program matches W-2 and 1099 information with the information you report on your tax return. When a mismatch occurs, expect to receive an automated CP2000 notice from the IRS notifying you of the additional amount due.
  3. You own a business. Rules regarding business deductions are confusing and constantly changing. The IRS knows this. Incorrectly deducting personal expenses or having your business classified as a hobby, thereby eliminating deductions, can get you in trouble with the IRS. Cash heavy businesses are under increased scrutiny due to higher fraud rates. Solid tracking processes and good records are necessities for income and expense substantiation.
  4. You make a math error. The IRS identified over 2.5 million math errors on 2016 returns. The biggest culprits are tax and credit calculations. Math errors can create a two-fold problem for you – additional tax owed and more scrutiny applied to other parts of your tax return.
  5. You claim the Earned Income Tax Credit. According to a report by the U.S. Treasury Department, 24 percent or $16.8 billion in EITC payments were issued improperly in Fiscal Year 2016. Numbers that large are sure to get the IRS’s attention. Eligibility confusion and calculation errors are mostly to blame.

While some of the risk factors are out of your control, many can be minimized. If you are chosen for an audit, don’t deal with the IRS alone – please call for help.

Category: The Audit

Published: 11/30/2018




Your Weekly Tax Tip
Phone: 323.292.5407
IRS Releases Key 2019 Tax Information
article image

The IRS recently announced key tax figures for 2019, using information based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.

Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 37 percent. Each of the income brackets increases between 1.8 and 2 percent.

Standard Deductions:

2019 Standard Deductions

Other Key figures:

2019 Other Key Figures

Caution: Remember, these early IRS figures are prior to any potential tax law changes currently under consideration in Washington D.C.

Category: What’s New

Published: 11/16/2018

Want A Bigger Nest Egg?


Your Weekly Tax Tip
Phone: 323.292.5407
Tips to Fund your Retirement Account
New 2019 contribution limits create retirement saving opportunity
article image

For the first time in six years, limits for IRAs are rising. 401(k) accounts and IRAs will see an increase of $500 in contribution maximums for 2019. Check out the table below for the details:

IRA 2019 Contribution Limits table

How can you take advantage?

Contributing the full amount allowable to a retirement plan will maximize your tax savings and increase your compound interest earnings potential. Need help making these contributions a reality? Here are some ideas:

  • Contribute your raise or bonus. A great time to contribute to a retirement plan is when you receive a raise or bonus. It allows you to take some or all of the additional income and invest in your future without changing your current lifestyle. Your investment will go even further if your employer offers a plan that matches your contribution.
  • Cut your spending. Start by reviewing your ongoing expenses and creating a budget. Maybe you have a subscription you can cancel or a service provider you can contact to negotiate a lower rate. Then look for ways to reduce your spending on day-to-day expenses – like food, for example. Some ideas to lower food costs are bringing lunch to work, skipping the coffee shop, limiting dinner out at restaurants and shopping at less expensive grocery stores. Use this money to fund your account.
  • Add a side job. At some point, there are only so many expenses you can cut. Picking up some side income might be the way to go. Whether it’s a part-time retail job or starting your own small business, the additional income might be enough to get you to your savings goal. ​
  • Automate your contributions. Most plans offer a way to contribute automatically. If you have a plan through work, check to see if it has an auto-escalation feature that increases contributions over time. If you are investing in an individual plan, set up auto contributions to pull from your bank account on a monthly basis.

Working through these ideas now gives you a great chance to take advantage of the benefits of funding new or existing retirement accounts. Why not take full advantage of the tax benefits they provide? Please call if you have any questions.

Category: Retirement

Published: 11/09/2018

Recent tips

Guess Who is Getting a Raise?


Your Weekly Tax Tip
Phone: 323.292.5407
2019 Social Security Changes Announced
article image

The Social Security Administration announced a 2.8 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2019. The increase is the largest in seven years, and is based on the rise in the Consumer Price Index over the past 12 months ending in September 2018.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.5 percent this year, to $132,900. A recap of the key amounts is outlined here:

2019 Key Social Security Benefits

2019 Social Security Benefits

What does it mean for you?

  • Up to $132,900 in wages will be subject to Social Security taxes, up $4,500 from 2018. This amounts to $8,239.80 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
  • For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,461 per month in 2019 – an average increase of $39 per month.
  • SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
  • A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2018 to 2019.

2019 Social Security and Medicare Rates

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Category: Retirement

Published: 11/02/2018

Recent tips
Search Tips

Footer accent

Surprise! The Mutual Fund Tax Trap


Your Weekly Tax Tip
Phone: 323.292.5407
Surprise! The Mutual Fund Tax Trap
article image

Too often taxpayers receive tax surprises at year-end due to actions taken by mutual funds they own. What can add insult to injury is the unsuspecting taxpayer who recently purchases the shares in a mutual fund only to be taxed on their recent investment. How does this happen and what can you do about it?

Tax surprises

Towards the end of each year, many mutual funds pay a dividend to the holders on record as of a set date. The fund might also distribute funds deemed as capital gains based upon buying and selling activity that takes place in the fund throughout the year. This can create many problems:

  • Taxable paybacks. If you purchase shares in a mutual fund just before a distribution of dividends, part of your purchase includes the dividends that are effectively paid right back to you. Not only will the asset value of your recently purchased shares in the mutual fund go down after the distribution, but you will owe tax on a distribution that is effectively your own money!
  • Kiddie tax surprise. Many taxpayers purchase mutual funds in their children’s names to take advantage of their lower-tax rates. By keeping their child’s unearned income below $2,100 the tax is low or non-existent. A surprise dividend or capital gain could expose much of this unearned income to higher tax rates.
  • The $3,000 loss strategy. Each year, you may take a net of up to $3,000 in investment losses. Your losses can offset high rates of income tax with correct tax planning. But first, these losses need to offset capital gains. If you receive a surprise capital gain, you could be reducing the effectiveness of this tax strategy.

What to do

Here are some ideas to help reduce this mutual fund tax surprise:

  • Limit year-end activity. Plan your mutual fund moves with this year-end surprise in mind. Consider reviewing and rebalancing your funds at the beginning of the year to avoid fund purchases just prior to dividend distributions.
  • Research your mutual funds. If you wish to avoid a year-end surprise, do a little research on your mutual funds to anticipate what will happen with the fund. Check out the historic trends of your funds to determine which are most likely to issue a surprise Form 1099 DIV or Form 1099 B (capital gain/loss).
  • Use the knowledge to your benefit. If you like a fund and it has a practice of creating taxable events each year, consider investing in these funds within a retirement account. That way the tax implications can be part of your retirement planning.

No one likes a surprise at tax time. The best course of action regarding your mutual funds is to consult with an expert who can help you navigate the options that are best for you.

Category: Planning

Published: 10/26/2018

Recent tips



Your Weekly Tax Tip
Phone: 323.292.5407
It’s Your (and the IRS’s) Lucky Day!
You won a prize. Now what?
article image

When you win a prize, there are really two winners: you and the taxing authorities. Should you be fortunate enough to win that trip of a lifetime to the French Riviera in your new yacht, here is what you need to know.

Prizes are taxable. Almost all prizes are taxable income. You report them on your income tax return as other income. This is the case whether your prize is cash, merchandise, or free services.

The prize may be reported to the IRS. Prizes valued at $600 or more must be reported to the IRS. However, prize values below this reporting threshold may also be reported at the discretion of the sponsor of the prize. As the winner, you should look to receive the proper Form 1099-MISC.

Employee awards are a different animal. When you receive a prize or something of value from your employer, different rules apply. These fall under business expense, fringe benefits, and award rules. Things like a holiday gift of a turkey or occasional service award are often (but not always) a non-taxable award. On the other hand, a bonus or prize points for merchandise as a sales award usually need to be claimed as income.

Gifts and prizes have different tax rules. A different part of the tax code applies to gifts. In short, gifts received from someone that are less than the annual gift threshold ($15,000 in 2018) are not deemed prizes.

Other considerations and tips

Should you receive a prize during the year, here are some tips to consider:

Donate to charity. If you wish to avoid paying tax on the prize you can refuse the prize or opt to donate the prize to a charity. It is best to sign appropriate paperwork to assign ownership of the prize to the charity and have the prize sent directly to them as you cannot use the prize before donating it.

Establish fair market value. Should you win property, like a car or vacation trip, establish the fair market value (FMV) of what you won. Hosts of prize contests often over-value the prize to aid in marketing their contest. You do not want to pay tax on an over-inflated value. So if you win merchandise, get copies of advertisements for the item. If it is a trip, document hotel rates, transportation costs and cost of meals to build a case for a lower FMV. If there is a discrepancy with the value received, show your documentation to the provider of the prize and get your 1099 value corrected.

Keep good records. When you win a prize, fill out a sheet outlining the details of the event. Record the identity of the sponsor, the date, a detailed description of what was won, copies of documentation, photos of the items won, and the approximate retail value (ARV) assigned to the prize by the sponsor.

Plan for the tax. Using the ARV provided to you by the sponsor, determine if you will be able to pay the tax for the prize. You may need to plan to make an estimated tax payment to avoid any surprises when you file your tax return.

Remember should you be lucky enough to win a prize, ask for help to determine whether this “other income” could create a tax problem.